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Where are Gold and Silver Headed in 2012?

December 25, 2011

Gold and silver prices changed direction very sharply throughout 2011: despite the sharp gains of gold and silver prices up until September, precious metals prices changed direction during the last quarter of the year and plummeted in a very short period of time; from this drop precious metals didn’t recover throughout the remainder of the year. Silver price declined below its initial price level from the beginning of the year, while gold price ended the year only 12% above its price level from January 3rd 2011. Can we learn from the developments in the bullion market during 2011 to predict what will be the direction of gold and silver prices in 2012? Let’s examine up close the development of precious metals prices in 2011 and offer a broad prediction for gold and silver prices in 2012.

Gold and Silver Prices 2011

During the first few month of the year, silver price sharply outperformed gold price and by the end of April silver price rose by nearly 56%, while gold price by only 9% from the beginning of the year. Once the price of silver sharply rose, CME raised the margins on silver; this action had an immediate response in the market and by May 17thsilver prices declined to 7% above the initial price level. The next rally came from May to the beginning of September for both gold and silver prices. This rally came when the uncertainty in the markets rose especially around the speculation around the stability of the U.S. economy. This included the debate around raising the debt ceiling. This rally came to a halt in September, not only because the CME intervened and raise margins on gold and silver, but also because the FOMC decided to purchase $400 billion worth long term securities in lieu of another Quantitative Easing Plan. Since many had anticipated the Fed to come up with another stimulus plan, once there was only a plan to purchase LT securities without expanding the monetary base, the decline of precious metal prices soon followed.

The chart below shows the development of gold andsilver prices during 2011, in which gold and silver prices are normalized to 100 for January 3rd, 2011.

The next chart shows the development of the ratio of gold price to silver price (gold price/silver price) during 2011; the ratio had a downward trend during the first few months of the year as silver price outperformed gold price, but towards the next several months the ratio had an upward trend as silver price underperformed gold price.

To Sum up the development of precious metals prices in 2011 let’s divide between factors that positively affected bullion and factors that negatively affect precious metals prices.

Here are five factors that may have affected gold and silver to trade down in 2011:

The FOMC’s decision not to add another stimulus plan (quantitative easing 3) during the second part of 2011;

CME’s decisions to raise the margins on silver and gold;

The European Debt Crisis that affected gold price especially during the second part of the year, via the liquidity problem that many EU banks and traders faced;

The strengthening of the U.S dollar against other currencies (see below);

The shift in market sentiment from considering gold a safe haven to a risky asset;

On the other hand, I consider there were three factors that pushed up gold and silver prices mainly during the first three quarters of 2011:

The FOMC’s decision to issue QE2 by the end of 2010; this action raised the monetary base and consequently positively affected gold and silver prices mainly during the first few months of the year;

Following the performance of the gold and silver prices in 2011 what should be expect in 2012?

Outlook for Gold and Silver Prices – 2012

Let’s also break this forecast into factors that could push up precious metals prices compared with factors that may pull bullion prices down.

Here are three reasons why I speculate gold and silver prices will remain high and even rise in 2012:

Quantitative Easing Plan #3: if the U.S. economy won’t start to recover, there is the possibility (even if it’s a small one) that the Fed will issue another stimulus plan (QE3);

Low interest rates: as long as the U.S. will keep its interest rates low, gold and silver prices are likely to remain high;

Slowdown in the U.S. economy: since the U.S is entering an election year, the economic issues are likely to take the back seat; if the U.S. economy will enter a double dip rescission, precious metals are likely to thrive.

Here are four reasons to trade down gold and silver in 2012:

Recovery of U.S. Economy: If the U.S. economy will show signs of slow recovery as in the last few months of 2011, this may curb the rally of bullion prices and lower the chances of the Fed issuing another stimulus plan (QE3);

The European Debt Crisis: if the EU will continue to struggle in dealing with the debt crisis, this may also adversely affect gold and silver prices;

CME Margins: as seen in 2011, CME is likely to keep a vigilant eye on the development in the bullion market; if there will be a sharp gain, be sure there is the possibility that CME will intervene and raise margins again.

U.S. Dollar: If the U.S. dollar will continue to strengthen against other currencies including CAD and AUD, this may also negatively affect gold and silver prices.

Considering the statements mentioned above, I speculate there is a good chance gold and silver prices will perform poorer in 2012 than in 2011. If there will be another stimulus plan or an event that will stir up the markets then there is a small chance that gold and silver prices will perform better in 2012 than in 2011, but not by much.

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6 comments for “Where are Gold and Silver Headed in 2012?”

ron

December 29, 2011 at 10:51 am

When do you see silver at 36 dollars an ounce again?
That is the amount I have invested in american silver eagles.
($20,000.00)
……And what do you suggest I do?
Better long then wrong? Or sit tight and be right?
Respectfully yours,
R.t.

Thank you for your question.
Unfortunately I must refrain from voicing my opinion on this issue as it may constitute a financial advice as described in the disclaimer page

I only provide general market analysis about the precious metals market. In this aspect, I have stated in the article my opinion about my guess for the direction of gold and silver in 2012.
Have a good New Years and good luck,
Lior

Alex

January 3, 2012 at 9:34 am

hi Lior, thanks for your analysis. One thing that puzzles me: you mention that the EU crisis is bad for gold prices. A tear ago everybody speculated that gold would be a perfect hedge should the crisis come up again. What triggered the change and why should gold be positively correlated with EU problems? Cheers for 2012! Alex

Hi Alex,
Thank you for your comment and kind words, its much appreciated.
I have referred to this issue in a recent post, but in a nut shell the EU debt crisis seems to adversely affect the precious metals prices via the Euro currency, the liquidity problem of EU banks that are forced to sell their holdings in commodities including gold and the seemingly paradigm shift in recent months in which gold is becoming less of a safe haven investment as it traditionally perceived.
These are my two cents on this issue.

Alex

January 3, 2012 at 5:18 pm

thanks, appreciated!

bill

January 5, 2012 at 9:56 pm

What if other countries start to get rid of the U.S. dollars that they have in reserve instead of precious metals?